Beyond Hot Money: Brokered Deposits and Bank Funding Stability

In addition to stable core deposits, many U.S. banks also rely on non-core insured funding-especially brokered deposits (BDs)-which supervisors and analysts often associate with risk-taking and run-proneness. We test the latter. In sharp contrast to the "hot money" view, BD funding remains available and scales in system-wide stress episodes, including the 2008-09 crisis and the 2023 banking turmoil, and serves as a source of liquidity for vulnerable banks facing uninsured deposit outflows. Yet banks with higher BD shares appear more fragile on outcomes-they experience sharper uninsured deposit outflows and weaker equity performance in shocks, especially during the 2023 banking turmoil. We reconcile these facts by showing that the adverse outcomes are concentrated among institutions that increased BD-reliance on the eve of the Turmoil, suggesting the outcomes reflect self-selection and negative market inference. While our findings alleviate run-fragility concerns, the non-selective access to BDs during stress reinforces concerns about moral hazard.